Having both a wonderful business and a cheap price is an unbeatable combination. Mr. Buffett calls such events “No-brainers”. With both of these qualities in your business, the odds are stacked heavily in your favour of a successful and profitable outcome.
In fact, the two together deliver what we call the Holy Grail of Investing, what every financial school and educational program teaches is not possible to have:
- High rates of return
- Low risk
Every school of finance teaches its students the idea that if you want high returns, you must assume high risk. Conversely, low risk is accompanied by low rates of return. This has remained an unquestioned dictum. Mr. Buffett and a few others have proven otherwise.
This is best expressed in the following graph we have created from the “double-dip” concept described by Mr. Buffett in his 1989 annual report Berkshire Hathaway:
“…our performance to date has benefited from a double-dip: (1) the exceptional gains in intrinsic value that our portfolio companies have achieved; (2) the additional bonus we realized as the market appropriately “corrected” the prices of these companies; raising their valuations in relation to those of the average business (3)”.